We have released our Q3 2010 market report for the Silicon Valley Medical office space market. Vacancies continued to rise slightly to about 8% across 385 buildings. Rents remained fairly steady at an average of $2.44 psf/month. Despite the gloom and doom that hangs over the economy, there are signs of improvement. May of Silicon Valley’s largest companies are flush with cash, and continue to hire. There is also activity in the venture-backed world and competition for engineers at many of Silicon Valley’s tech companies is fierce right now as evidenced by Google’s 10% across the board pay-raise (30% for execs) and year end bonuses.

In the medical office market though, if you are a tenant, it continues to be a good time to lease or purchase. Interest rates are low on the purchasing front, and landlords are being aggressive with rent concessions and improvement allowances on the leasing front. It’s not quite a landlord’s market, but some sub-markets have experienced great leasing activity this past quarter, while others such as the El Camino/Mountain View and Palo Alto markets never really went down.

If you would like to receive the full quarterly report, sign-up on our website to receive it, and you’ll also receive next quarters report when the time comes around.

El Camino Hospital is laying off 181 employees at its Los Gatos and Mountan View hospitals. In Los Gatos, the company is laying off 40, and in Mountain View, 141 positions will be impacted. The date of impact will be October 13, 2010.

Despite holding up better than most other industries, medical is not entirely immune. Unemployment has led to more and more individuals going without healthcare or dental care, and economic conditions have forced many to forgo care, or settle for alternative sources of healthcare (county hospitals, etc.)

We have released our quarterly market report for the Silicon Valley medical office market. Vacancy rates remain fairly steady, slipping from 7.82% from 7.51%. Rental rates went from $2.55 gross in the previous quarter to $2.39 gross. Despite the up-tick, the medical market continues to benefit from far better fundamentals than the generic office and R&D market which are suffering from historically high vacancy rates. Even the most seasoned office landlords we know feel less optimistic about the future than at anytime they did before in Silicon Valley when the market slumped.

We also continued to add properties to our database, and we now track over 375 buildings.

If you would like to receive the full quarterly report, sign-up on our website to receive it, and you’ll also receive next quarters report when the time comes around.

HealthMed Realty is proud to announce that it has been given the exclusive listing assignment to sell or lease 3395 South Bascom Avenue. The property is situated on the San Jose/Campbell border, is located near Good Samaritan Hospital and Los Gatos.

The building totals approximately 6,450 square feet, and is divisible from 990 SF all the way up to the entire 6,450 square feet.

The asking price for the property is $2,295,000 on a sale, and $2.35 psf/month NNN on a lease. A flyer for the property is embedded below.

There was a BOMA conference on Medical Office Building (MOB) and Healthcare Facilities in Chicago last week in Chicago. The CRE Insider blog attended and did a great job outlining the conference.

Like other commercial real estate asset classes, MOB too is faced with too much capital and too little product. In other words, if you are a seller – it is a good time to consider selling. This is especially true if you plan on taking capital gains and not exchanging into another asset as capital gains taxes will very likely be headed up soon.

Anyhow, here are some key points from the article, but visit the blog for all the notes:

Cap rates have compressed 50-75 bps since a year ago and range anywhere from 7.5% for on-campus, Class A MOB to 9.5%-10% for off-campus, Class B.

The REITs have had a buying spree, particularly Healthcare Trust of America. HTA has been raising $2-$4 million a day on average and has not been shy about putting it into acquisitions. In our opinion, HTA alone has caused cap rates for Class-A to compress by ±25 bps from a year ago.

Foreign investors are showing “tremendous interest,” as one panel participant put it, in the medical real estate market due to the higher relative returns and lower volatility compared with many European markets. Healthcare reform has, however, kept some foreign capital at bay due to a perceived uncertainty of outcome in its application.

National developers are looking to partner with local developers

Regionalization of health systems will lead to new freestanding emergency departments with some MOBs as a way to limit costs while expanding footprint size

and the last one is our favorite, because we’ve felt this is the direction healthcare is going to go in:

There is a growing trend to redevelop retail space to medical use because:

Retail provides immediate access to an existing consumer base

Providers can leverage stronger branding of their names

There will be a higher need for primary care as the insurance rolls expand

Occupancy costs are generally lower, especially in the current real estate market

Retail vacancy can provide immediate occupancy

End-cap users, like Blockbuster, are leaving and providing premium locations

Hospitals and providers want to be near their customers

Retailers can leverage increased daytime traffic, particularly as most medical consumers going to these locations tend to be women

The Wall Street Journal is out with an article detailing the burgeoning demand for doctors in the United States. By some estimates, the United States will face a shortage of 150,000 doctors in fifteen years. Healthcare reform is anticipated to increase the demand – primarily at the PCP level – and medical schools are having trouble keeping up.

At current graduation and training rates, the nation could face a shortage of as many as 150,000 doctors in the next 15 years, according to the Association of American Medical Colleges.

That shortfall is predicted despite a push by teaching hospitals and medical schools to boost the number of U.S. doctors, which now totals about 954,000.

The greatest demand will be for primary-care physicians. These general practitioners, internists, family physicians and pediatricians will have a larger role under the new law, coordinating care for each patient.

The U.S. has 352,908 primary-care doctors now, and the college association estimates that 45,000 more will be needed by 2020. But the number of medical-school students entering family medicine fell more than a quarter between 2002 and 2007.

Some other notables from the WSJ article:

The law offers sweeteners to encourage more people to enter medical professions, and a 10% Medicare pay boost for primary-care doctors.

As of last October, four new medical schools enrolled a total of about 190 students, and 12 medical schools raised the enrollment of first-year students by a total of 150 slots, according to the AAMC. Some 18,000 students entered U.S. medical schools in the fall of 2009, the AAMC says.

There are about 110,000 resident positions in the U.S., according to the AAMC.

The following graphic produced by the WSJ also highlights where the shortage falls:

For better or worse, the implications of the massive Healthcare Bill are slowly being understood; however little certainty has yet to be seen. For commercial real estate owners and investors however one thing is for certain – medical real estate’s core supply and demand fundamentals will be shocked.

Surely, adding 32 million Americans to the ranks of the insuranced, coupled with the emergence of the largest aging cohort this country has ever seen, will undoubtedly add significant demand for healthcare. Experts estimate nearly 60 million square feet of new medical real estate is needed alone due to the new legislation (standard industry metric of 1.90 square feet for each new patient brought into the system.) But who really stands to capture all this growth? Due to the design of the Bill, much of this demand will likely be captured by hospital institutions rather than private investment, private physicians and/or doctor owned practice facilities.

Private physicians are left concerned with reimbursement rates. Through the medium and long term, doctors will see declining government reimbursements for certain procedures. This may affect some, such as family physicians who may need to see upwards of 50% more patients in order to maintain the same income level. Shrinking profits could make it difficult for doctors who don’t belong to a hospital group to afford occupancy costs, which could negatively impact occupancy and rents for outlying areas.

Additionally, the Bill places limits on any new or expanded Physician-Owned Hospitals; the Senate version of the Bill (if approved) effectively halts ANY expansion or new construction altogether, by denying them Medicare reimbursements. The ban would start on Aug. 1 or Dec. 31 if the Senate approves “fixes” in the reconciliation bill. Also, new Medicare taxes on investment income and capital gains, including rental income, will financially pressure landlords, doctors and other high-income earners.

Hospitals, with an eye towards greater efficiency, will likely respond by expanding on-campus facilities as well as establishing smaller satellite offices for outpatient facilities, ambulatory care, and medical office – the whole intent will be keeping patients out of costly inpatient beds. Because of rising costs and declining revenues, many doctors not connected with physician groups or hospitals may have to join up with practices owned by hospital systems and become tenants of their on or off-site campuses. As those investment grade properties fill up with good-credit long-term tenants, there will be a greater opportunity for institutional investors to invest; therefore, allowing hospitals to raise the liquidity they need through private Joint Ventures, Dispositions and Sale Lease Back transactions.

In today’s environment it’s critical for private physicians to think strategically about these issues and plan accordingly. Make certain you are comfortable with how the legislation will impact your business. If appropriate, consider the benefits of securing a competitive advantage by locking in today’s cheap real estate costs for the future. Attractive financing, low lease rates, and lower building prices currently exist and maybe the key for a healthy business in the future.

One component of the Healthcare Bill that was passed is a new Medicare tax on investment income. Designed to help offset the cost of the overhaul of the healthcare system, a new tax of 3.8% is levied on investment income for individuals reporting more than $200,000 in income, and joint filers earning reporting more than $250,000. The tax will start in 2013, but the far-reaching definition of income is what should catch the attention of both landlords and tenants. Under the bill, investment income includes interest, dividends, annuities, royalties, capital gains, and rents.

Given the timetable for the tax, both landlords and tenants should be aware of the impact this tax could have on their rent, term, and operating expense provisions of their lease.

With so much at stake given the recent healthcare legislation, it’s interesting to consider a local perspective on the matter. The Business Journal recently published an article with the opinions of some of the Bay Area’s most influential healthcare leaders. For the most part, many are holding their breath awaiting further clarification on Bill’s policies and overall implications. The following is a glimpse of their perspectives.

Jane Ogle, chief operating officer of the Santa Clara Family Health Plan, “called it 100 years overdue”. She expressed disappointment that the number of the Law’s provisions, including the establishment of insurance exchanges and the expansion of Medi-Cal, don’t take effect until 2014. But she called “huge” the protection given to the Healthy Families Program that provides low-cost insurance to children and teenagers who don’t qualify for Medi-Cal.

Paul Beaupre’, CEO of Good Samaritan Hospital, said that right now the federal government is talking about insuring people at the same rate as MediCal, the states program to cover the poor. But in California, this doesn’t ensure access to care, he said. Many physicians won’t accept these rates, which are some of the lowest in the nation for medical reimbursement. He added that the bill is an important first step, nonetheless. He hopes small business owners will finally see those premium increases subside.

Jim Dover, CEO of O’Connor Hospital, explained that when the expanded coverage begins in 2014, hospitals will see fewer uninsured patients in their emergency rooms. At O’Connor, which is run by Daughters of Charity Health System, about one third of those currently walking in through the doors have no insurance.